Q3 2023 Equity Bancshares Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the Q3 2023 equity Bancshares, Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session. Please press star one on your <unk>.
Allophone and wait for your name to be announced to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today.
Ryan Reed director of Investor Relations.
Good morning.
Thank you for joining us today for equity Bancshares third quarter earnings call before we begin let me remind you that today's call is being recorded and is available via webcast at Investor Day equity Bank Dot com.
Along with our earnings release and presentation materials.
Today's presentation contains forward looking statements, which are subject to certain risks uncertainties.
And other factors that could cause actual results to differ materially from those discussed.
Following the presentation, we will allow time for questions and further discussion. Thank you all for joining us.
With that I'd like to turn the call over to our chairman and CEO .
Yeah.
Good morning, and thank you for your interest in equity Bancshares.
We're excited today to take you through our third quarter results.
Beating consensus earnings.
Continued improvement in credit quality.
20% increase in.
Our quarterly dividend.
As we continue to emphasize shareholder return.
Before we get into the details.
Pleased to introduce my fellow speakers.
CFO , Chris <unk>, who many of you have met over the years during his tenure as our CFO .
And our Chief Credit Officer Christophe <unk>.
Each has been with our company for more than five years of senior leadership roles.
There are promotions provide for a seamless transition of job responsibilities.
While ensuring the company is capable operators with proven track records in alignment with our company's core values.
Also joining us today is our president Rick Sims.
Well, let's look back at the third quarter.
Our balance sheet strength.
Getting high levels of capital robust loan loss reserves.
Payable liquidity.
Has continued to provide stability in a dynamic and challenging operating environment.
We believe this environment is ripe with opportunities and we are excited about our prospects for organic growth in both deposits and loans.
As well as M&A opportunities.
Our teams continue to focus on value creation.
Value begins with an engaged employee base, which drives excellent outcomes for our customers and shareholders.
Our commercial and retail teams continue to deliver positive outcomes during the quarter and look to build additional momentum into the fourth quarter and 2024.
Our credit and commercial teams successfully encouraged several undesirable credits to find new banking partners this quarter.
Some classified and others just flag as outside of equities current tolerances.
We're being proactive in combing, our portfolio and working with customers to get ahead of any potential down cycle.
Capital in all forms tangible people community is it banks differentiator a potentially challenging times.
We believe we have an abundance of all to be deployed for the benefit of our stakeholders.
I'll, let Chris talk you through our financial results.
Thank you Brad.
Last night, we reported net income of $12 $3 million or <unk> 80 per diluted share as compared to 74 per diluted share in the second quarter net interest income was up $1 $6 million linked quarter, while net interest margin improved to $3 51 from $3 38 will discuss margin dynamics in more detail later in this call.
Noninterest income adjusted for the loss on repositioning of investments in Q2 was up $500000 linked quarter.
Positive trends included a 4% increase in service fee revenue.
Noninterest expenses totaling $34 $2 million were higher quarter over quarter, primarily due to onetime incentive compensation reversals in Q2 that were not expected to repeat.
Our GAAP net income included a provision for credit loss of $1 $2 million to understand the attribution of the inputs you can reference our earnings deck, which shows the calculation.
We continue to hold reserves for potential economic challenges. However to date, we have not seen any specific specific concerns in our operating markets.
At September 30 coverage of ACL to loans is 135% I'll stop here for a moment and let christophe talked through our asset quality for the quarter.
Thanks, Chris as of the end of the third quarter asset quality continued to trend positively.
Classified loans closing the quarter at $37 3 million or six 3% of total bank regulatory capital its lowest level since we started the company.
Non accrual loans as a percentage of total loans remained below 60 basis points.
Net charge offs when year to date annualized or 11 basis points with average loans.
Now no one occupied office is an ongoing area of concern for the banking industry.
Equity bank's portfolio totaled 77 million and represents just two 3% of the total loan portfolio and was reduced by $14 million this quarter.
Our average loan size of $2 2 million.
We were able to successfully reposition our largest exposure to office during the quarter with another financial institution further reducing risk within our portfolio.
Now in the owner occupied CRE and CRE construction balances ended the quarter, 187% of total bank capital.
As compared to the industry our exposure is limited.
We have stress tested our top relationship exposures at 300 basis points from today's rates without repayment concerns based on current income streams.
We believe our portfolio is diverse both in nature, and geography, which when combined with our disciplined underwriting loss reserves and capital position us well to navigate any challenges that may arise in the future.
Thanks, Christoph end of period loans declined in the quarter as Brad mentioned during the quarter management work with our borrowers to exit a number of cardiac exposures, which were no longer within our risk appetite, which contributed to the realized contraction.
Loan originations in the third quarter totaled $149 million with a weighted average coupon of 846% compared to $153 million with a weighted average coupon of 780% in the second quarter and $173 million with a weighted average coupon of 595% in the third quarter of 2022.
We continue to success successfully originate loans in the current interest rate environment contributing to expanding yields on interest earning assets during the third quarter the yield in the loan portfolio increased 34 basis points to 667%.
Increases the fee in purchase accounting accretion accounted for eight basis points from the periodically permit.
Cost of interest bearing deposits increased 26 basis points to 240% in the quarter, while the contribution of noninterest bearing deposits to the mix remained relatively flat.
The velocity of liability repricing continues to slow as compared to the peak quarter over quarter increase of 68 basis points in Q1 of 2023.
Net interest income totaled $41.0 million in the third quarter up $1 6 million from the second quarter, driven by appreciation in earning asset yields in excess of cost of interest bearing liabilities.
Equity maintained enhanced liquidity on our balance sheet from actions, we took to respond the market dislocation in the first quarter.
Average interest bearing cash increased to $268 million in the quarter from $185 million in the second quarter.
We continue to have $140 million outstanding at the Federal Reserve Bank term funding program. We are currently earning a positive spread on that borrowing now it does have the effect of reducing margin, we calculate that the excess liquidity has the effect of reducing margin by six basis points for the current quarter.
Salaries and benefits increased 600000 in the quarter due to forfeiture invested restricted stock in Q2, which was not expected to repeat.
Operating expenses are elevated from advertising to continue to attract deposits.
Our outlook slides includes a forecast for the fourth quarter as well as our preliminary view of 2024, we do not include future rate changes, though our forecast still includes the effects of lagging repricing in pulp our loan and deposit portfolios.
Our provision is forecasted to be approximately 10 basis points to average loans right. Thanks, Chris.
I am pleased with what we accomplished this quarter and all of that we are positioned to accomplish moving forward as we continue to emphasize value creation in our markets during the quarter, our non brokered deposit base declined by 98 million attributable to seasonal outflows in our municipality operating accounts of approximately $110 million.
Important to note this trend was not due to loss of relationship.
These operating accounts typically spend out in the third quarter and are replenished by the collection of tax revenues in the fourth quarter.
Excluding these seasonal outflows retail deposit funding was up during the quarter as our teams continue to develop and grow customer relationships, while maintaining deposit pricing discipline.
We believe that we have the team and suite of products to remain the banker of choice in the markets we serve.
On the asset side of the balance sheet, our loan production continued at a consistent pace as we originated the same dollar level of loans in Q3 as in Q2, but improved yields and ROE to the bank overall balances were hampered by payoff headwinds, although approximately $26 million.
We're deteriorating or criticized loan $35 million were lower yielding loans, we chose not to chase and $34 million.
Loans tied to solar projects of note, our Tulsa region led by Ryan Morris and our Western Kansas region led by Levi guests have been strong as we look to the fourth quarter our markets.
Led by regional Ceos, Mark Parman, Josh means and Brad Daniel our growing pipelines back from Loews felt in early Q3, and our teams are motivated to build into the end of the year.
As of the end of the quarter or 75% probability pipeline stood at $300 million, while our 50% probability was $400 million we have the.
Strategy discipline tools and people in place to drive organic customer centric growth, while achieving the proper return on our capital I look forward to assisting the team execution as we move forward.
Finally service revenue was up quarter over quarter, primarily driven by our credit card insurance and wealth management business lines. Each of these lines are in their infancy in terms of income statement impact and along with Treasury management has the capacity to be meaningful contributors to service revenue in future periods.
Thanks, Rick.
Our company is well capitalized our asset quality metrics are the best they've ever been.
Our balance sheet structure is solid and we have a granular deposit base.
We conducted our Offsite board strategic meeting this quarter and.
And we all left that meeting very optimistic about what equity can accomplish over the next year and more so over the next three years.
We're pretty positioned with great products that Julie Huber Charlton layer.
Driving into the fabric of the company.
I believe we have the best products that technology in our region.
And with a great team of leaders, we can accomplish a lot over the next few years.
We continue to see momentum on the M&A front and expect to see that to continue over the next several quarters.
Equity will remain disciplined in our approach to assessing these opportunities.
Emphasizing value, while controlling dilution and earn back timeline.
With that we're happy to take your questions.
Thank you.
Reminder, to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for questions.
Our first question comes from Terry Mcevoy with Stephens you May proceed.
Hi, Thanks, good morning, everyone.
Maybe Brad a question for you can you just discuss loan growth opportunities in 2024 are there certain markets that stand out is it CRE C&I a little bit more specific there would be helpful and as a part of that do you expect to continue to strategically push out certain credits that <unk>.
And earlier on the call.
Yes so.
2020 for loan growth I think our teams are really focused criteria. We've had some strategic meetings over the last couple of months.
So I think all of our markets, obviously are very focused on how do they grow loans.
Unknown Executive: Good day, and thank you for standing by.
Unknown Executive: Welcome to the Q3 2023 Equity Bancshares earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session to ask a question during the session. Please press star 11 on your telephone and wait for your name to be announced to withdraw your question. Please press star 11 again.
I think Kansas City, which got Tulsa are always the leaders of that.
We've got some good momentum going in Tulsa.
That team has really worked hard on getting moving that direction, but also our western Kansas markets. Our Western Missouri markets are also focused on those so I would I would just say we're really laser focused on this is a great time for equity bank to attract customers.
Unknown Executive: Please be advised that today's conference is being recorded.
Unknown Executive: I would not like to hand a conference over to your speaker today.
Brian Katzfey: Brian Katzfey, Director of Investor Relations. Good morning. Thanks for joining us today for Equity Bancshares third quarter earnings call. Before we begin, let me remind you that today's call is being recorded and it's available via webcast at investor.equitybank.com, along with our earnings release and presentation materials. Today's presentation contains four looking statements with our, with our subject to certain risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed. Following the presentation, we will allow time for questions and further discussion. Thank you all for joining us.
I think it.
We've been a very balanced organization. So I think it will come in small business lending.
C&I and CRE.
And we've never really been focused on one area. So I think it will come in all aspects of those categories on the.
Are we pushing out we've got one credit that's actually already paid off this quarter that we're pushing out we don't have a lot of other credits that were putting pressure on to move at this time.
But.
If something Pops up we will use the tools, we have to make that credit move.
Thanks, Brad and then maybe a follow up for Chris could you just talk about the excess liquidity, which has impacted the margin what are your thoughts for 2024 and what type of assumptions are you, making for the initial 2024 outlook that's in the slide deck today.
Brad Elliott: With that, I'd like to turn the call over to our chairman of PEO, Brad Elliott. Good morning. And thank you for your interest in equity bank shares. We're excited today to take you through our third quarter results, including needing consensus earnings, continued improvement in credit quality, and a 20% increase in our quarterly dividend as we continue to emphasize shareholder return.
Yes, so for that initial outlook, we're looking at more of a normalization of that excess liquidity position. The bank term funding program borrowing that we have on the books now matures in the first quarter next year. You ended the first quarter basically was put on commensurate with.
Unknown Executive: Before we get into the details, I'm pleased to introduce my fellow speakers.
Third the situation so think of that same time horizon as to when that matures.
Chris Navratil: PFO, Chris Navratel, who many of you have met over the years during his tenure as our bank CFO.
At that point, the arbitrage that exists today will go away and we won't have the same need to keep that on balance sheet liquidity. So pending other material concerns are rising I think we'll go back to a normalization of cash any expectation that we're targeting and that's what's depicted in the outlook is repositioning that cash.
Krzysztof Slupkowski: And our chief cred officer, Kristoff Klukowski. Each has been with our company for more than five years in senior leadership roles. Their promotions provide for a seamless transition of job responsibilities. While assuring the company has capable operators with proven track records and alignment with our company's core values.
Into earning asset classes predominantly loans.
That is advantageous to the earning stream next year.
Okay.
For taking my questions.
Brad Elliott: Also joining us today is our president, Rick Sims. Let's look back at the third quarter. Our balance sheet strength, including high levels of capital, robust loan loss reserves, and available liquidity, has continued to provide stability in a dynamic and challenging operating environment. We believe this environment is right with opportunities, and we are excited about our prospect for organic growth in both deposits and loans, as well as M&A opportunities. Our teams continue to focus on value creation.
Thanks, Craig.
Okay. Thank you one moment for questions.
Our next question comes from Jeff <unk> with D. A Davidson you May proceed.
Thanks, Good morning.
Brad on your.
And then M&A commentary just interested in.
Obviously, we've seen some deals of late just nationally.
Kevin.
Given where we are in the right world, we've seen some pretty large great marks and therefore, some pretty sizable tangible book dilution numbers I guess the figure to focus on would be that the earn back period and I guess as you look at deals.
Brad Elliott: Value begins with an engaged employee base, which drives excellent outcomes for our customers and shareholders. Our commercial and retail teams continue to deliver positive outcomes during the quarter and look to build additional momentum into the fourth quarter in 2024. Our credit and commercial teams successfully encourage several undesirable credits to find new banking partners this quarter. Some classified and others just flag as outside of equity's current tolerance. We're being proactive in combing our portfolio and working with customers to get ahead of any potential downcycle. Capital in all forms tangible people, community is a bank differentiator in potentially challenging times. We believe we have an abundance of all to be deployed for the benefit of our stakeholders.
Is there a is there a watermark on on tangible book earn back that you'd like to stay within given opportunities that you see.
Yes, we've been very consistent on three years and under.
I would say.
We're probably south of that as well.
So we.
We've not stretch that tangible.
Book value earn back period for US we still think it's got to be within that period for it to be good for the investors and.
And shareholders of equity bank.
Because we just we can't take the risk that it's going to take longer to earn that back.
Then three years, because things just changed so much in three year periods.
And.
You talk about some of the credits you pushed out it would signal a little bit.
Credit wariness, but I guess.
Given that backdrop.
The comparability of acquiring someone it.
You guys are.
Seem to be kind of.
Actively managing that how do you square that with going and buying another bank.
Chris Navratil: I'll let Chris talk you through our financial results.
Under that credit backdrop.
Chris Navratel: Thank you, Brad. Last night we reported net income of $12.3 million or 80 cents per diluted share as compared to 74 cents per diluted share in a second quarter. Net interest income was up $1.6 million link quarter while net interest margin improved to $351 from $338. We will discuss margin dynamics in more detail later in this call. Now an interest income adjusted for a loss on repositioning of investments in Q2 was up $500,000 link quarter.
Yes, I think the institutions. We're looking at have good credit we aren't currently looking at anything that has bad credit, although we don't mind cleaning up somebody else's credit.
That's part of.
Our strategy that we need to do we just put a appropriate mark on that we bought.
We bought a bank.
Seven we bought a bank.
When we bought it we bought banks 10 and 11.
Which were some of the worst credit cycles that we've ever seen.
We never missed a credit mark during the cycles knock on wood.
Chris Navratel: Depositive trends included a 4% increase in service fee revenue. Net interest expenses totaling $34.2 million were higher quarter over quarter. Primarily due to one time incentive compensation reversals in Q2 that were not expected to repeat. Our gap net income included a provision for credit loss of $1.2 million to understand the attribution of the inputs. You can reference our earnings back which shows the calculation. We continue to hold reserve for potential economic challenges however to date we have not seen any specific concerns in our operating markets.
So we feel very confident in our underwriting ability and the person who has done all of that underwriting and all those marks as Julie Huber, who is still with us and so she has been because we've been through this war.
<unk> been very seasoned about going through that process.
Got it thanks, maybe just a last one.
And if you know I guess of those credits.
Kind of pushed out any sense for where those borrowers are landing not specifics, but just generally speaking is there a competitor to that yet.
Chris Navratel: September 30 coverage of ACL phones is 1.35%.
Broadbrush brush who.
Krzysztof Slupkowski: I'll stop here for a moment and let Chris talk through our asset quality for the quarter. Thanks Chris. As of the end of the third quarter asset quality continued to depend positively with total classified loans closing the quarter at $37.3 million or 6.3% of total bank regulatory capital its lowest level since we started the company. Not a cruel loss of the percentage of total loans remained below 60 basis points. Net chargers when the year today annualized are 11 basis points with average loans.
<unk>.
It's taking that credit on some cases.
Yes.
They're smaller institutions nonpublic theyre, taking those credits on.
But.
The community banks.
Just arent as sophisticated in their underwriting is what I would say they are leaning more on the.
Network.
Of the borrower that's on its stated personal financial statement.
And so there may be a little truck factor in there and that they may not have the most accurate financial statements.
Krzysztof Slupkowski: Now in order to occupy an office is an ongoing area of concern for the banking industry. Equity banks portfolio total 77 million and represents just 2.3% of the total loan portfolio and was reduced by 14 million this quarter. Our average loan size is 2.2 million. We were able to successfully reposition our largest exposure to office during the quarter with another financial institution further reducing risk within our portfolio. Now in our occupied CRE and CRE construction balances ended the quarter 187% of total bank capital.
No.
They are relying on that that personal guarantees more than the project. The project is not cash flowing.
So you have to really look at that personal guarantee and have to believe that the Paris.
Guaranteed gets to continue to pay that back.
Yes.
Great. Thank you.
Thank you and as a reminder to ask a question. Please press star one on your telephone one moment for questions.
Our next question comes from Andrew Liesch with Piper Sandler You May proceed.
Krzysztof Slupkowski: As compared to the industry our exposure is limited. We have stressed us that our top relationship exporters at 300 basis points from today's rates without repayment concerns based on current income streams. We believe our portfolio is diverse both in nature and geography, which when combined with our discipline on writing, loss reserves, and capital, position us well to navigate any challenges that may arise in the future.
Andrew Your line is now open please on mute if you're on mute.
Alright, everyone. So just wanted to add.
Touch base about the margin here.
I would've expected it to be a little bit.
Higher going into next year, and I know you had the eight basis points of higher than expected accretion this quarter.
Krzysztof Slupkowski: Thanks, Krzysztof. End of period loans declined in the quarter. As Brad mentioned, during the quarter management worked with our borrowers to exit a number of credit exposures which were no longer within our risk appetite, which contributed to the real-life contraction. Loan originations in the third quarter totaled 149 million with a weighted average coupon with 8.46 percent compared to 153 million with a weighted average coupon of 7.80 percent in the second quarter and 173 million with a weighted average coupon of 5.95 percent in the third quarter of 2022.
So that might be some headwind in the near term.
But even at the low end of that for the fourth quarter using as a jumping off point into 2024 I would've expected.
Based on what we just saw this quarter that you'd be at.
<unk> hundred 55, or even or even more are you seeing out there that something out there.
That might suggest that the margin on the top out at $3 55, maybe at the high end. It just seems to me that theres more room to run there.
Yes, Andrew I would say, there's some conservatism built into that number just based on unknowns on the liability side of the balance sheet.
Krzysztof Slupkowski: We continue to successfully originate loans in the current interest rate environment contributing to expanding yields on interest earning assets. During the third quarter the yield in the low portfolio increased 34 basis points to 6.67 percent. Increases the fee and purchase accounting accretion accounted for 8 basis points of the periodic improvement. Cost of interest varying deposits increased 26 basis points to 2.40 percent in the quarter while the contribution of non-interest varying deposits to the mix remain relatively flat.
We understand pretty well, our asset repricing and our capacity to continue to drive some asset repricing.
On being opportunistic in the bond portfolio and other means.
But the liability side, it's just too much of an unknown as we move forward as to how deposits might reprice, where the real.
Kind of top of the cycle is going to be and how long it's going to extend.
Based on that there is just some uncertainty as to where it will level out on NIM.
Krzysztof Slupkowski: The velocity of liability repricing continues to slow as compared to the peak quarter over quarter entries of 68 basis points in Q1 of 2023. Net interest income totaled 41.0 million in the third quarter up 1.6 million from the second quarter driven by appreciation and earning asset yields in excess of cost of interest varying liability.
We're very optimistic align with you that on the on the asset side, we will continue to drive up and will continue to realize the appreciation in the marketplace.
But the liabilities are just uncertainty at this point, we're so what's driving that forecast Magee.
Got it alright, thanks, that's really helpful.
And then just shifting gears.
Krzysztof Slupkowski: Equity maintained enhanced liquidity on our balance sheet from actions we took to respond to market dislocation in the first quarter. Average interest varying cash increased to 268 million in the quarter from 185 million in the second quarter. We continue to have 140 million outstanding at the Federal Reserve's bank term funding program. We are currently earning a positive spread on that borrowing. No, it does not have the effect of reducing margin. We calculate that the excess liquidity has the effect of reducing margin by 6 basis points for the current quarter. Salaries and benefits increased 600,000 in the quarter due to forfeiture of vested restricted stock in Q2 which was not expected to repeat. Marketing expenses are elevated from advertising to continue to attract deposits.
The allowance and the provision.
The ratio has been mid 130 is now for the last few quarters.
I mean absent any major shift.
Please go modeling or the credit environment is kind of a level that you guys think Greg we speak forecasting what the reserve.
Yes, we continue to think about provisioning is 10 basis points of average allowance.
We've kind of been running seasonal in this <unk>.
Challenging economic environment for a while which is led to continuation of that 130 ish basis points 130 to $1 40.
Total loans I don't know that I have a number post any economic constraint of where we would think that seasonal levels out in a normalized operating environment, but it's less than 135 basis points just based on historical loss experienced to date. So.
Krzysztof Slupkowski: Our outlook slide includes a forecast for the fourth quarter as well as our preliminary view of 2024. We do not include future rate changes. No, our forecast still includes the effects of lagging, reprising and both our low end deposit portfolios. Our provision is forecasted to be approximately 10 basis points to average loans. Right?
The economic turmoil, but to resolve itself and losses weren't to be realized youre going to wind up having to release some of that provision via credit provisioning, but as we stand today with the level of uncertainty that still exists keeping it around that 135 basis points continues to make sense.
Rick Sims: Thanks, Kristen. I am pleased with what we accomplished this quarter and all that we are positioned to accomplish moving forward as we continue to emphasize value creation in our markets. During the quarter, our non-broker deposit base declined by 98 million attributable to seasonal outflows in our municipality, operating accounts of approximately 110 million.
Got it.
Alright.
That concludes my questions. Thanks, so much ill get back.
Thank you.
Thank you one moment for questions.
Rick Sims: Important to note, this trend was not due to loss of relationship. These operating accounts typically spend out in the third quarter and are replenished by the collection of tax revenues in the fourth quarter. Excluding these seasonal loss lows, retail deposits funding was up during the quarter as our teams continued to develop and grow customer relationships while maintaining deposit pricing discipline. We believe that we have the team and suite of products to remain the banker of choice in the markets we serve.
Our next question comes from Damon Delmonte with <unk> you May proceed.
Hey, good morning, guys. Thanks for taking my questions just wanted to circle back on.
The margin outlook as we look into 'twenty four.
How would you characterize the positioning of the balance sheet should the fed start to cut rates in the back half of the year.
Yes, so we're working.
We're working continually on assessing sensitivity, both asset and liability to manage their risk as it relates to you.
Rick Sims: On the asset side of the balance sheet, our loan production continued at a consistent pace as we originated the same dollar level of loans in Q3 as in Q2 but improved yields and ROEs to the bank. Overall balances were hampered by payout headwinds. Although approximately 26 million were deteriorating or criticized loan, 35 million were lower yielding loans we chose not to chase, and 34 million were loans tied to sold projects.
Downward trend in the.
That stands as we move forward.
<unk>, where we continue to be a little bit asset sensitive, which is what youll see in our changing NIM.
Period over period.
The majority of our liability book is still variable rate deposit portfolio. So capacity to reprice very quickly the challenge becomes how does the market dynamic behave.
We go into a rate reduction cycle from the from that that if competition is.
Rick Sims: Of note, our Tulsa region led by Ryan Morse and our Western Kansas region led by Levi Gets have been strong. As we look to the fourth quarter, our markets led by regional CEOs Mark Parman, Josh Means, and Brad Daniel are growing pipelines back from lows felt in early Q3 and our teams are motivated to build into the end of the year. As of the end of the quarter, our 75% probability pipeline stood at 300 million while our 50% probability was 400 million. We have the strategy, discipline, tools, and people in place to drive organic customer-centered growth while achieving the proper return on our capital. I look forward to assisting the team in execution as we move forward.
Aggressive or irrational.
And rates continue to go up even as the fed begins to drop down we're going to see.
Some asset sensitivity, which is detrimental in the NIM in the near term.
Majority of again of our liability book is variable rate deposit pricing. So we do have capacity to reprice it quickly.
Depending on overall market dynamics.
Got it that's helpful. Thank you.
And then with respect to expenses.
It looks like the outlook for 'twenty four you basically take your forecast for the fourth quarter and add that to the first three quarters of 'twenty three.
It seems very minimal growth 23 over 'twenty to 'twenty four.
What are some of the things you guys are doing or what gives you confidence that you can kind of keep.
Rick Sims: Finally, service revenue was up quarter over quarter, primarily driven by our credit card, insurance, and wealth management business lines. Each of these lines are in their entities in terms of income statement impact and along with Treasury management have the capacity to be meaningful contributors to service revenue in future periods.
The growth at a very.
Minimal level kind of in light of the inflationary backdrop that we continue to deal with.
Yeah. So we're working hard on a number of things to rationalize some.
Vendors and to the extent that we're adding folks into our vendor mix, replacing legacy vendors such not incrementally additive costs.
Brad Elliott: Thanks, Rick. Our company is well capitalized. Our asset quality metrics are the best they've ever been. Our balance sheet structure is solid and we have a granular deposit base.
And there are some things that are just built into noninterest expense that won't repeat next year.
From a baseline perspective, so we've talked about in the past those taller tax investments that we've made that historically have been reflected in our bottom line as part of noninterest expense, that's going to go away and materially next year. So this year, we're modeling about $4 million in total expense above the line that moves into tax expense next year and will essentially be pulled out.
Brad Elliott: We conducted our off-site board strategic meeting this quarter and we all left that meeting very optimistic about what equity can accomplish over the next year and more so over the next three years. We are positioned with great products that Julie Huber and Charlton Lair are driving into the fabric of the company. I believe we have the best products and technology in our region and with a great team of leaders we can accomplish a lot over the next few years.
Non interest so that's an incremental cost saves of about $3 million because there will still be some dollars in that <unk> line and that just being strategic on some contracts I think we have opportunity to you.
Mitigate some additional cost there as well, where we can hold the line a bit and the expansion of NII on a normalized basis, when you pull out that solar tax textiles.
Brad Elliott: We continue to see momentum on the M&A front and expect to see that to continue over the next several quarters. Equity will remain disciplined in our approach to assessing these opportunities, emphasizing value while controlling delusion and the earn back timeline.
Tax dollars.
Solar tax dollars coming out of the noninterest expense are probably what's driving the higher effective tax rate as well.
Yes, that's right okay.
Okay.
And then just lastly on <unk>.
On the M&A.
Brad you imply that.
Unknown Executive: With that, we're happy to take your questions. Thank you. As a reminder, to ask a question, please press star-1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star-1-1 again. One moment for questions.
Kind of optimistic that some deals will be happening in the future.
How would you kind of handicap the odds of you guys finding a partner in the next call it six to nine months.
I would I would handicap by giving you a percentage, but I would handicap it is pretty strong.
Okay.
Okay.
Thats all I had thank you very much.
Okay.
Thank you.
One moment for questions.
Our next question comes from Terry Mcevoy with Stephens you May proceed.
Unknown Executive: I just discussed long-growth opportunities in 2024. There are certain markets that stand out. Is it CRE, CNI?
Hi, Thank you just one follow up when you think about your TCE ratio are you using the 9.55%, which excluding the OCI or the the 7% to 9% and I'm asking the question.
Brad Elliott: A little bit more specific. There will be helpful. As a part of that, do you expect to continue to strategically push out certain credits that you mentioned earlier on the call? Yeah, so 2024 long growth, I think our teams are really focused. Terri, we've had some strategic meetings over the last couple of months. And so I think all of our markets honestly are very focused on how they grow loans. I think CN City, Wichita Tulsa, are always the leaders of that.
Better understand some of the capital deployment comments, specifically around buyback.
Yeah Truthfully I can answer first and then Brian can jump in I think we look at both numbers Terry we're very aware of bulk numbers as.
We think about capital activity.
Being cognizant of both of those figures are understanding how.
I'm trying to assess the best utilization of our capital.
Brad Elliott: We've got some good momentum going in Tulsa, which that team has really worked hard on getting moving. That direction, but also our Western Kansas markets, our Western Missouri markets are also focused on those. So I would just say we're really laser focused on this. This is a great time for Equity Bank to attract customers. I think we've been a very balanced organization. So I think it will come in small business lending, CNI and CRE.
Repurchase be it M&A.
Security.
Positioning for example, right so a number of different potential capital usage.
Leverage today that are meaningful into the future.
Thinking about both of those ratios as well.
Brian do you want to add.
I would say.
Exactly what Chris said, we look at both ratios.
And are very cognizant of both of those ratios.
Brad Elliott: And we've never really been focused on one area. So I think it will come in all aspects of those categories. On the, you know, we're pushing out. We've got one credit that's actually already paid off this quarter that we're pushing out. We don't have a lot of other credits that we're putting pressure on to move at this time. But, you know, something pops up. We will use the tools we have to make that credit move.
And then we look at what we think the odds of deploying capital.
Unknown Executive: Thanks, Brad.
And the best form for shareholders and so what moves the needle most from an earnings per share basis right.
Right now theres not a lot of dilution.
So we really are looking at.
Doing that we've been holding capital back.
Recently, because we think there are some things in there that we could deploy that capital in versus buybacks.
Their future so we've been.
Chris Navratil: And then maybe a follow up for Chris. Could you just talk about the excess liquidity, which has impacted the margin? What are your thoughts for 2024 and what type of assumptions are you making for the initial 2024 outlook?
A little light on the buyback lately.
Great. Thanks again.
Yes.
Thank you and this concludes today's conference call. Thank you for participating you may now disconnect.
Chris Navratil: That's in the slide deck today. Yeah, so for that initial outlook, we're looking at more of a normalization of that excess liquidity position, the bank term funding program, borrowing that we have in the books now, the chairs in the first quarter next year, the end of the first quarter. It basically was put on commensurate with the city of the situation. So think of that same time rising as to when that matures at that point, the arbitrage that exists today will go away.
Okay.
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Okay.
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Chris Navratil: We won't have the same need to keep that on balance sheet liquidity. So pending other material concerns arising. I think we'll go back to a normalization of cash. And the expectation that we're targeting that's what's depicted in the outlook is repositioning that cash into earning asset classes predominantly loans. That is advantageous for the earnings. Next year. Thanks for taking my questions. Thanks, Jerry.
Unknown Executive: Thank you, one moment for questions.
Brad Elliott: Our next question comes from Jeff Rulis with the Davidson, you may proceed. Thanks, good morning. Brad on your kind of M&A commentary, just interested in obviously we've seen the deals of late, this nationally given, given where we are in the rate world, we've seen some pretty large rate marks and therefore some pretty sizable tangible book dilution numbers. I guess the figure to focus on would be the earned back period. And I guess as you look at deals, is there a, is there a watermark on tangible book earned back that you'd like to stay within given opportunities that you see?
Okay.
Brad Elliott: Yeah, we've been very consistent on three years and under and I would say, you know, we're probably south of that as well. So we've not stretched that tangible book value earned back period for us. We still think it's got to be within that period for it to be good for the investors and shareholders of equity bank because we just, we can't take the risk that it's going to take longer to earn that back than what, you know, then three years because thanks just changed so much in three of your periods.
Brad Elliott: Yeah. And you know, you talk about some of the credits you've pushed out and would signal a little bit of credit weariness, but you know, I guess given that backdrop, the the comfortability of acquiring someone and you know, you guys are seem to be kind of actively managing that. How do you square that with, you know, going and buying another bank, you know, under that credit backdrop? Yeah, I think the institutions we're looking at have good credit.
Brad Elliott: We aren't currently looking at anything that has bad credit although we don't mind cleaning up somebody else's credit. If that's part of the strategy that we need to do, we just put a appropriate mark on that. You know, we've bought, we bought a bank in 07, we bought a bank in 09, we bought, we bought banks in 10 and 11, which were, you know, some of the worst credit cycles that we've ever seen, we've never missed a credit mark during the cycles knock on wood.
Brad Elliott: And so, you know, we feel very confident in our underwriting ability and the person who's done all of that underwriting and all those marks is Julie Huber who's still with us. So she's been, she's been through this war and has been very seasoned about going through that process. Got it. Thanks.
Brad Elliott: Maybe just the last one. And if you know, I guess of those credits that you've kind of pushed out any sense for where those borrowers are landing and not specifics, but just generally speaking, is there a competitor that yeah, Broadbush, brush, who is taking that credit on in some cases? Yeah, they're smaller institutions, non-publics, they're taking those credits on.
Brad Elliott: But the community banks just aren't as sophisticated in their underwriting is what I would say. They're leaning more on the net worth, of the of the borrower that's on its stated personal financial statement. And so, you know, there may be a little truck factor in there in that they may not have the most accurate financial statement. And so, you know, they're relying on that that personal guarantee more than the project. The project is not cash flowing. And so you have to really look at that personal guarantee and have to believe that that the personal guarantee can continue to pay that back. Right. Thank you.
Unknown Executive: And as a reminder to ask a question, please press star 1-1 on your telephone one moment for questions.
Andrew Liesch: Our next question comes from Andrew Liesch with Piper Sandler. You may proceed. Andrew, your line is now open.
Chris Navratil: Please unmute if you're on mute. Oh, sorry, everyone. So, yeah, just wanted to touch base about the margin here in the in the guide. I would have expected to be a little bit higher going into next year. And I know you had the 8 basis points of of higher than expected accretion this quarter. To that might be some headwood in the near term. But even at the low end of that for the fourth quarter, using as a jumping off point into 2024, I would have expected based on what we just saw this quarter that you be at 35 or even more.
Chris Navratil: Are you seeing out there that something out there that might suggest that the margin to top out at 355. Maybe at the high end, it just seems to me that there's more under one there. Yeah, Andrew, I'd say there's some conservatism built into that number just based on unknowns on the liability side of balance sheet. We understand pretty well our asset reprising and our capacity to continue to drive some asset reprising via being opportunistic in the bond portfolio and other means.
Chris Navratil: But the liability side is just too much of an unknown as we move forward as to how deposits might reprise where the real kind of top of the cycle is going to be and how long it's going to extend. And based on that, there's just some uncertainty as to where we'll level out on them. We're very optimistic a lot with you that on the on the asset side will continue to drive up and we'll continue to realize the appreciation in the marketplace, but the liabilities are just uncertainty at this point, which is driving that forecast.
Chris Navratil: Got it. All right, that's what we helpful. And then the shifting years just to the allowance and the provision was a ratio has been made one thirties now for the last few quarters. Here's kind of, I mean, absolutely any major shift in people modeling or the credit environment is kind of the level that you think that we should be just forecasting up the reserve. Yeah, we continue to think about provisioning and 10 basis points of average loans.
Chris Navratil: You know, we've kind of been running Cecil in this challenging economic environment for a while, which is led to continuation at that 130 ish basis points 130 to 140 total loans. I don't know that I have a number post any economic constraints of where we would think that Cecil levels out in a normalized operating environment, but it's less than 135 basis points is based on historical loss experience today. If the economic turmoil was to resolve itself and loss is work to be realized, you're going to find up having to release some of that provision via credit provisioning. But as we stand today, with the level of uncertainty, it still exists. Keeping it around that 135 basis points continues to make sense.
Andrew Liesch: Got it. All right, those are my questions. Thanks so much. I'll get back. Thank you.
Unknown Executive: One moment for questions.
Damon Delmonte: Our next question goes from Damon DelMonte with KVW. He may proceed. Hey, good morning, guys. Thanks for taking my questions. Just wanted to circle back on the margin outlook as we look into 24. How would you characterize the positioning of the balance sheet? Should the Fed start to cut rates in the back half of the year? Yeah, so we're working. We're working continually on assessing. Sensitivity, both asset and liability to manage the risk as it relates to downward trend in the Fed stance as we move forward.
Damon Delmonte: Today, we continue to be a little bit asset, which is what you'll see in our changing name period over period. But the majority of our liability book is still variable rate deposit portfolio, so capacity to reprise very quickly. The challenge just becomes how does the market dynamic behave? As we go into rate reduction cycle from the fact that if competition is aggressive or irrational and rates continue to go up, even as the Fed begins to drop down, we're going to see some asset sensitivity, which is detrimental to them in the near term.
Damon Delmonte: But the majority of our liability book is variable rate deposit pricing, so we do have capacity to reprise it quickly, depending on overall market dynamic. Got it. That's helpful. Thank you. And then with respect to expenses, it looks like the outlook for 24. If you basically take your forecast for the fourth quarter and add that to the first three quarters of 23, it seems very minimal growth, 23 over 24. What are some of the things you guys are doing or what is your confidence that you can keep the growth at a very minimal level in light of the inflationary background?
Damon Delmonte: Yeah, so we're working hard on a number of things to rationalize some vendors and to the extent that we're adding folks into our vendor mix replacing legacy vendors, so it's not incrementally additive cost. And there's some things that are just built into non-interested expense that won't repeat next year from a baseline perspective, so we've talked about the past, those solar tax investments that we've made that historically have been reflected above the line as part of non-interested expense.
Damon Delmonte: That's going to go away materially next year, so this year, we're modeling about $4 million in total expense above the line. That moves into tax expense next year and will essentially be pulled out of non-interest. So that's the incremental cost rate of about $3 million, because there will still be some dollars in that NIE line. And then just being strategic on some contracts, I think we have opportunity, to mitigate some additional costs there as well where we can hold the line a bit in the expansion of NIE on a normalized basis when you pull out that solar tax, no solar tax dollars.
Damon Delmonte: And those solar tax dollars coming out of the nine inch expense are probably with driving the higher effective tax rate as well. Yeah, that's right. Okay, and then just lastly, you know, on the M&A, you know, Brad, you know, you imply that, you know, kind of optimistic that some deals will be happening in the future. You know, how would you kind of handicap the odds of you guys finding a partner in the next call at six to nine months? I would handicap, I might give you a percentage, but I'd handicap it as pretty strong. Okay, okay, that's all that I had. Thank you very much. Thank you. One moment for questions.
Terry Mcevoy: Our next question goes from Terry McEvoy with Stevens, you may proceed. I think just one follow up, when you think about your TCE ratio, are you using the 9.55% which excluding the AOCI or the 7.29% and I'm asking the question to better understand some of the capital deployment comments specifically around buyback. Yes, truthfully, I can answer first and then Brad can jump in. I think we look at both numbers, Terry, we're very aware of both numbers.
Terry Mcevoy: As we think about capital activity, we're being cognizant of both of those figures and understanding how trying to assess the best utilization of our capital, be it repurchased, be it M&A, be it security, repositioning for example. So a number of different potential capital uses, we can leverage today that are meaningful into the future and we're thinking about both of those ratios as we're assessing. Brad, do you want to have that? Yeah, I would say exactly what Chris said.
Terry Mcevoy: We look at both ratios and our very cognizant of both of those ratios. And then we look at what we think the odds of deploying capital in the best form for shareholders and so what moves the needle most from an earnings for share basis, right now there's not a lot of delusion. So we really are looking at doing that. We've been holding capital back recently because we think there's some things that we could deploy that capital in versus buybacks in the very near future.
Brad Elliott: So we've been a little light on the buyback lately.
Unknown Executive: Great.
Unknown Executive: Thanks again.
Unknown Executive: Thank you.
Unknown Executive: And this concludes today's conference call. Thank you for participating. You may now disconnect. Thank you.